On May 26, 2017 a federal judge in Florida issued an order in an appeal from a Bankruptcy Court proceeding that could have a chilling impact on the consumer litigation activities of a local Bankruptcy Trustee and Special Counsel to the Trustee. The case is Cadlerock Joint Ventures, L.P. v. Christine Herendeen and Thomas A. Lash (Case No. 16-cv-2046, U.S. D.C. Middle District of Florida).

The case was decided by the Honorable James S. Moody, Jr., United States District Court Judge.

From the court’s order:

“The procedural history of this individual case is extensive and adequately summarized in the parties’ briefs. The essential issue here is whether the Bankruptcy Court should have sanctioned the Bankruptcy Trustee and Special Counsel based on their common practice and conduct of filing meritless cases. Special Counsel has a paralegal attend § 341 Meetings of Creditors in order to solicit potential violations of consumer protection acts against creditors. That common practice gave rise to the filing of this meritless case against Appellant Cadlerock Joint Ventures, L.P.”

The parties have a slightly different perspective on the facts of the case. A copy of the Cadlerock brief can be found here. A copy of the Lash brief can be found here. A copy of the Herendeen brief can be found here.

Key Issue

Judge Moody defined the issue:

“As Appellant (Cadlerock Joint Ventures, L.P.) stated during oral argument, this appeal turns on the Bankruptcy Court’s decision to limit the sanctions proceeding to the facts of this case alone. By limiting its review to this singular case, the Bankruptcy Court concluded that there was not “a whiff of an abuse of process . . .” The Bankruptcy Court focused on the fact that the adversary proceeding complaint was dismissed within the safe harbor time period and concluded that any erroneous allegations contained in the complaint were therefore harmless.

In narrowly limiting its review, the Bankruptcy Court was unable to consider certain statistical evidence that was presented to this Court during the pendency of this appeal about the Trustee’s and Special Counsel’s pattern and practice of filing similar meritless lawsuits. This evidence goes to the heart of the sanctions issue—that is, whether it is an abuse of process under § 105(a) for a bankruptcy trustee to invite a law firm’s paralegal to solicit claims at the 341 hearing, and then permit the filing of adversary proceedings without any further inquiry into the claims’ merits.

If the Bankruptcy Court had permitted discovery on this statistical evidence, it may have had a different perspective and may have reached a different conclusion about the appropriateness of sanctions. The evidence, if true, raises grave concerns about the Trustee’s conduct in this case and prior cases. In a larger sense, this evidence raises a concern about an abuse of the overall bankruptcy process.” (Emphasis added by insideARM.)

The court’s determination

Judge Moody found the following:

“The evidence suggests that Appellees have made a habit of routinely filing thousands of lawsuits against creditors with little investigation of the facts and alleging identical boilerplate language. The boilerplate complaints are supported by only the Trustee’s leading line of questioning at a debtor’s 341 hearing. Creditors are forced to settle or spend attorney’s fees to defend these meritless lawsuits, or are left with no option but to execute a joint stipulation of dismissal with prejudice, thereby waiving any subsequent claim for sanctions or attorney’s fees to compensate them. The statistical evidence suggests that more than 1/3 of all cases filed (864 out of 2,494) were voluntarily dismissed with no recovery for the bankruptcy estate.

In denying sanctions under 11 U.S.C. § 105(a), the Bankruptcy Court noted in its Order on Special Counsel’s Amended Motion for Summary Judgment that if it “believed that the Trustee and Special Counsel had engaged in any wrongdoing, that the public was endangered by their conduct, or that there was any mockery of the Court’s processes,” it would impose sanctions. But it would be impossible to conclude whether the public, or creditors, were negatively impacted by the Trustee’s and Special Counsel’s conduct because the Bankruptcy Court limited the record to the facts of this case and then granted summary judgment in Appellees’ favor. Restricting discovery in this manner was error because Appellees’ conduct in similar cases is highly relevant to determine whether an abuse or “mockery” of the bankruptcy process occurred and whether it will continue to occur.”

Judge Moody ultimately determined:

“The Court concludes that the Bankruptcy Court committed error when it granted summary judgment in Appellees’ (Herendeen and Lash) favor prior to permitting limited discovery regarding Appellees’ conduct in similar cases. Statistical evidence regarding Appellees’ similar filings was presented to this Court, which the Bankruptcy Court did not have the opportunity to review. Accordingly, the Court reverses and remands on this narrow and limited issue so that the Bankruptcy Court can consider this statistical evidence, determine if additional discovery is necessary, and, in light of this evidence and any additional discovery, make supplemental findings of fact on the issue of whether sanctions are appropriate in this case.”

insideARM Perspective

insideARM normally writes an original perspective on cases we cover, however, in this case, we are going to simply reprint comments from Judge Moody as they are probably better than any commentary we could write on our own.

Judge Moody wrote:

"Finally, the Court is compelled to comment further on the issue of whether Appellees’ conduct constitutes inappropriate solicitation. As the Court previously noted, it has serious concerns about the Trustee’s conduct of having a paralegal from Special Counsel’s office attend the 341 hearing to essentially “drum up” business, especially when the Trustee has a financial interest in monies recovered (up to 25%), but has nothing to lose if the suit is frivolous. The Court understands that the solicitation issue is skirted because the Trustee, not the debtor, owns all assets (not claimed as exempt), including all causes of action previously owned by the debtor. Because the Trustee has invited the lawyer—or his paralegal—to attend, the questions posed by the lawyer to ferret out a claim are not technically a “solicitation.” But, taking this reasoning further, the Trustee could invite a whole panel of lawyers to attend the 341 hearing. These lawyers, sitting like birds of prey, could pose questions about: potential car accident claims; recent medical treatment or surgeries; recent injuries; overtime claims; or about whether the debtor had received improper legal advice. At some point, while perhaps successfully avoiding the “solicitation” issue, such conduct would constitute an abuse of the bankruptcy process.

Regardless of the technicalities, if one out of every three or four cases filed are meritless, something is wrong with the process. On remand, the Bankruptcy Court should consider whether allowing this process to continue without correction is abuse.” (Emphasis added by insideARM)